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The pros and cons of insurance in your SMSF

SMSF technical expert and columnist for The Australian newspaper
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Have you often wondered whether you really need insurance in your super fund? Or if it’s better to purchase it outside your fund?

There are a number of benefits to owning insurance inside your SMSF, but there are also some pitfalls, so depending on your situation, it might be easier to keep your insurance separate.

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Let’s take a look at some of the pros and cons of using your super fund to purchase insurance.

First, the good points:

  • Tax concessions – in many cases, you can claim your insurance premiums as a tax deduction in your SMSF’s tax return. There are also potential death benefit concessions.
  • Death benefit nominations – you can potentially direct who receives your insurance death benefits and how they are paid. The money also doesn’t need to be paid into your deceased estate.
  • Wide range of benefits available – depending on the terms of your super fund’s trust deed, you can pay death, permanent disablement, temporary disablement and medical trauma benefits out of your super fund.
  • Flexibility in how benefits are received – you can elect to take most insurance benefits as lump sums or pensions.
  • Great deals – fortunately, Australia’s insurance market is quite vibrant and life insurers are always trying to improve their products or react to market innovations. This means you should stay on the lookout for better deals.
  • Automatically renewable – once a life insurer has accepted your policy, they can’t cancel it unless you stop paying the premiums or tell them you no longer want the policy.

Now for the bad points:

  • Complexity – super isn’t the easiest beast to handle; sometimes it might seem easier and less of a hassle to purchase your insurance outside of your SMSF.
  • Some tax concessions aren’t available – depending on the type of insurance you wish to purchase, not all tax concessions are available. For example, medical trauma insurance policy premiums are generally not tax deductible in your super fund.
  • Not all benefits are immediately available – if you purchase the wrong type of insurance, you might find that, while your SMSF can accept the claim, it can’t release the payment to you. Basically, the money stays locked away.
  • Life insurers aren’t necessarily focused on direct business – the vast majority of life insurers are focused on servicing financial advisers and see them as their main clients. You might find it tricky and time consuming dealing directly with these companies.
  • Dramatic rises in premiums – if you’re like me and in your mid-forties or older, then you might have noticed that insurance premiums start to become really expensive.
  • Under insurance and over insurance – most people are under insured – that is, they might insure their debts, but not the loss of important remuneration due to illness or injury. Other people have the opposite problem – they over insure.

As with all insurance, you have a ‘duty of disclosure’. If an insurer asks you a question and you answer it incorrectly or deliberately fail to disclose all relevant information, then the insurer can decline your claim.

As for premiums, if you’re under 40, it may be a good idea to see if your insurance costs will be cheaper in the longer term if you take a ‘level’ premium rather than a ‘stepped’ one (stepped premiums increase with your age whereas level premiums stay the same).

One last tip – if you’re going to change insurers, don’t cancel an insurance policy until you are 100% sure the new one is in place. Many people have been caught out after cancelling their policy too soon, then finding they can’t take out the new one, for whatever reason, leaving them uninsured.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Also in today’s Switzer Super Report

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